Weekend Strategy Review December 27, 2020
Posted by OMS at December 27th, 2020
The markets rose modestly on Thursday in light pre-holiday trading. The Dow finished with a gain of 70 points, closing at 30,200. The large cap index was up 20 points for the week. The NASDAQ and SPX were up 33 and13 points, respectively. Thursday’s trading did not produce any significant changes to the patterns or to my Market Timing Indicators.
From a pattern perspective, the Dow has still not exceeded its 18 December high of 30,304. That high must be respected as it could be the final top. It’s still possible that all trading since 18 December are part of waves 1 down and 2 up, with wave 3 down next. This continues to be my primary scenario unless the market exceeds 30,304. If that were to happen next week, it would mean that the alternate scenario is taking place, where the Dow would push higher into January as the final waves of Wave 5 up unfold. In this case, the overall pattern would likely become a double zig-zag instead of the simple zig-zag pattern. It would likely extend into January instead of terminating before year’s end.
The thing students need to watch now are the breadth and volume indicators. As of last Thursday, 3 out of the 4 breadth indicators that make up The Tide are negative. The lone holdout is the Hi-Lo indicator. This is a little strange as the Hi-Lo indicator is usually the first to turn. The tough ones to turn are usually Summation Index and the Up-Down Oscillator, but these have been negative for the past 5-6 trading days. The A-D oscillator has been negative for the past 4 trading days. So, breadth is telling me that this is NOT a healthy market.
However, the volume indicators on the Dow, NASDAQ, and S&P are still mostly positive. My custom VTI on the Dow is still lagging.
One of the things I demonstrated in my last training session, where I introduced my new Top Stock Rotation Strategy was to show you the importance of the volume (and breadth) in pushing the market higher. Without positive volume, the market does not go anywhere. It just sits there and churns. You never want to have large sums of money at risk when the volume indicators turn negative. You also don’t want have large sums at risk when the market is not trending. If the market is not trending, the odds are overwhelming that you are NOT making money. So, in effect, you’re putting your money (your retirement, your children’s education, etc.) at risk with little hope for gain. The stock market is NOT a place to be in when it’s not trending. Yeah, I know, you’ve been told that you should always keep your money in the market so it can ‘grow’. Maybe 60 years ago, that was true. Back then the country was growing. If you just picked stocks by throwing darts at the Wall Street Journal, you probably would have done well. But this is NOT the case anymore. Right now, the country is NOT growing and has several major problems.
For starters, the Corona virus has caused millions of people to be out of work. In response, the government has been spending or giving away huge sums of money to keep these people afloat and stimulate the economy. All this spending has created an enormous debt which is now over $27.5 Trillion and growing. Think about this for a moment…. $27.5 Trillion. It’s hard to imagine a number this big! It tells me that it really doesn’t matter who’s in charge in Washington, at least from an economic perspective, the interest on this incredible debt will reduce the amount of money available to grow the economy, regardless of what any politician says or promises. The fact is that the amount of money that the government receives through taxes is nowhere near the amount required to support the current level of spending. With a $27.5 Trillion debt and a GDP of only $21.4 Trillion, the fact is our country is broke! This is something that MUST be recognized as students develop their investment strategy for 2021 and beyond. No matter how you slice it, the enormous debt without the ability to pay (not enough GDP) will slow the economy and a impact the stock market. This is the reason we MUST pay attention anytime our volume indicators turn negative.
The market trades in waves or cycles. The last major cycle started in March 2009, just after the market crash of 2007-2008. Since then, the Dow has advanced in five major waves, the last wave being the Trump rally that started after his election in 2016. If you look at a weekly chart of the Dow, you can clearly see how these waves have developed. The crash that occurred last February was Wave 4 down of this final five wave sequence. This rise since the March bottom has been a five wave sequence that led to a wave 3 high top in September, then a wave 4 decline in late October, followed by the development of the Ending Diagonal for final wave 5 up. That’s where we are now…. completing the final waves of the Ending Diagonal. The pattern is right out of the textbook. It’s exactly what I used to teach, before Covid19 ended my Classes at UNF and FSCJ. It’s why I’m focusing on volume now. Students should also understand that since 30 November, the Dow (DIA) has stopped trending. Take a quick look at the Trend Indicators. Also, the Bollinger Bands continue tighten, suggesting the Dow is setting up for a Big Move. That move could be a final burst toward 30,600 (in the Bullish short-term wave 5 zig-zag scenario I described above) or the start of the Major decline I see coming. So, as the final days of 2020 wind down, keep your eye on the volume indicators.
This is a time when staying in the Top Stocks on the MWL should prove beneficial. With the Trend indicators on the Dow telling us the Up Trend is over, watch the same indicators on the Top Stocks . If they begin to move out of the Trend Mode, pay attention. It means that even the Best of the Best are starting to weaken. Also, pay strict attention to the exit criteria I presented in the follow-on training session.
BTW, I’ll begin posting the Top Five Weak stocks once the volume indicator on the Dow turns negative. I’ll also start writing more about gold and the miners once I see the indicators turn positive. Gold (the metal) turned positive on Friday, but the miners are still lagging. The pattern suggests that both could still go either way, up or down. Be patient.
Have a great Holiday Weekend.
That’s what I’m doing,
h
Market Signals for
12-28-2020
DMI (DIA) | POS |
DMI (QQQ) | POS |
A/D OSC | |
DEANs LIST | POS |
THE TIDE | NEU |
Index | Signal | Signal Date |
---|---|---|
DOW | NEU | 18 Dec 2020 |
NASDAQ | POS | 23 Nov 2020 |
GOLD | NEU | 17 Dec 2020 |
U.S. DOLLAR | NEG | 07 Dec 2020 |
BONDS | NEG | 09 Dec 2020 |
CRUDE OIL | POS | 11 Nov 2020 |
DISCLAIMER
As always, the Professor never makes recommendations. The information is provided on an educational basis so you can have informed discussions with your financial advisors and/or accountants about your individual investment decisions.
All of the commentary expressed in this site and any attachments are opinions of the author, subject to change, and provided for educational purposes only. Nothing in this commentary or any attachments should be considered as trading advice. Trading any financial instrument is RISKY and may result in loss of capital including loss of principal. Past performance is not indicative of future results. Always understand the RISK before you trade.
Category: Professor's Comments, Weekend Strategy Review